While Blockchain has applications in the entire gamut of end to end Supply Chain, its impact on Inventory Management is the least discussed. I plan to write a series of articles sharing my perspectives on application of Blockchain across the entire Supply Chain and decided to start with Inventory Management since it is the least explored in my opinion. Primarily, I will share my perspectives on application of Blockchain in the following three areas:
- Bullwhip effect
- Ordering cost
- Safety Stock
I will assume that everyone who is reviewing this article is familiar with what Bullwhip effect is in a Supply Chain context. Organizations of all sizes have been fighting a losing battle with Bullwhip effect for decades now. Every time there are advances in technology, we get euphoric that we may be able to fight the monster successfully but it does not happen. As Technology advances, so does the complexity of Supply Chains.
The only way, in my perspective, to minimize the ripples of Bullwhip effect, is by creating trusted synchronization. The fact is Bullwhip exists because participants throughout the Supply Chain lack real time information they can trust about the demand for the product they are buying or selling. Despite huge investment in technologies like EDI and enterprise Supply Chain software, there still has been limited visibility into where products are at any given moment.
Blockchain offers the possibility of real time, accurate insights into information about products as they move throughout the Supply Chain ecosystem. With Blockchain, you are getting everyone involved in the conversation at the same time without having to build additional connectivity over and over again. You get much more discreet, physical event tracking that ties more closely to the products than these very disparate physical and information Supply Chains of the past.
Inventory Ordering Cost
One of the key expenses associated with replenishment in Inventory management is “invoice match failures”. These occur because companies must make sure that invoices match the original order and the receiving document. When they don’t match, the accounts payable department investigates to reconcile the differences, and those reconciliations can take lots of time. In a nutshell, these invoice failures add to ordering cost.
Blockchain has the potential to make the reconciliation relatively quick and easy. Actually, incorporating a smart contract within the Blockchain could eliminate the need to do reconciliation. This can reduce cycle stock as well by lowering the cost associated with invoice match failures and thereby lowering overall ordering costs. A company can place more frequent orders, thus reducing the annual cycle stock holdings cost and quantity. This may also led to reduction in the size of accounts payable department.
We know that Safety Stock is primarily held to account for uncertainty, mainly demand and lead time uncertainty.
Imagine a Blockchain where every block recording a transaction showed the current number of units sold at every point in the supply network, along with a variety of forecasting models and a selection of the best forecasts based on Artificial Intelligence (AI). So a block can include information like:
- 24 Units sold yesterday
- 13 units sold so far today
- Average units sold per day over the past week is 19
- Forecasting model X predicts 21 units will be sold today
- Forecasting model Y predicts that 17 units will be sold today
- AI based forecast selection is 20 units
These blocks could be permissioned to all those in the Blockchain who could improve planning based on the information. Having all this aggregated view will reduce the uncertainty of demand significantly. This can be translated into a formula (a calculation that is based on picking from these numbers) which calculates the standard deviation of demand. The reduced uncertainty gets captured in the standard deviation calculation which should then indicate a need for holding lesser safety stock.
Recall that another aspect of Safety Stock calculation is transportation lead time. I will cover the difference Blockchain can make in Transportation but for this article, the gist is that it will help reduce transportation lead time uncertainty as well. Mathematically, that also translates into reduced Safety Stock.
Views my Own.